MINDING YOUR BUSINESS.

Board can help keep business on track

May 12, 2003|By Ann Meyer. Special to the Tribune. Ann Meyer is a Chicago-area freelance business writer.

While many independent business owners like being their own boss, that freedom unchecked is often a double-edged sword.

"Entrepreneurs are legendary for their vanity," says Harry Seigle, chairman of Seigle's Inc., an Elgin-based building products supply firm he owns with his brother Mark, the company's chief executive.

In their enthusiasm to forge ahead with a plan, many business owners shortcut their homework and fail to adequately consider the worst-case scenario. And rather than admit a mistake, they will dig themselves in deeper trying to turn around a failure instead of simply cutting their losses, he says.

But it doesn't have to be that way. What privately held companies need, Seigle says, are the same checks and balances that public companies use to keep their businesses on track. That means corporate governance--or an independent board of directors that will advise, criticize and force management to be accountable.

"The outsider is going to be much more fisheyed, much more discerning," he says. "Invariably, they'll ask, `Show us the worst-case scenario,'" Seigle says, noting that his company has had a board of directors since 1976. "We've found it very beneficial. An active board will drill down on budget differences and say, `Tell us what you're doing to correct the negative variances.'"

Business consultants and corporate governance experts echo Seigle, saying private companies should take advantage of the service an outside board can provide.

Companies of all sizes share in "the need for some outside perspective," says Roger Raber, president and CEO of the Washington-based National Association of Corporate Directors. Half of the association's members are privately held firms, Raber says. "Even in a very small company, it's a very useful position to fill," he says, noting that a board can help management confront issues they're not familiar with, such as acquisitions, long-term strategy, and succession or other management transitions.

"The purpose of governance is to add value to the strategic decision-making process of the operating company, and to represent the long-term interests of ownership," says Drew Mendoza, managing principal of the Family Business Consulting Group, based in Atlanta with offices in Chicago. The board should also model appropriate business behavior, he says. "That means things are looked at in the harsh light of day, with no self-dealing."

A need for objectivity

When Seigle joined his father in the family business nearly 30 years ago, he credits his law background for helping him recognize the need for an objective third party's involvement in the business. "Inherent in the father-son relationship, objectivity is compromised," he says.

Since then, the board has been instrumental in the company's growth from a small company with about $25 million in sales in the mid-1970s to a mid-size firm with about $200 million in sales and 710 employees today, Seigle says.

Along the way, the board guided Seigle's as it shied away from the consumer market that used to be its focus and steered more toward the professional builder's market and real estate development.

"That was a major change in strategy, and the board debated it for over a year," says Dan Campbell, a Seigle's director. "What Seigle's did is different from what a lot of people do in similar situations, and the board played an active role in that."

While the board guided Seigle's strategy, it also advised the company not to expand too rapidly, Seigle recalls. "One of the reasons we didn't grow too fast is because of the board and the caution they had about borrowing money too aggressively. They have a tendency to temper entrepreneurial zeal," Seigle says. "If you present ideas upon which you haven't done your homework, you'll sense by their questions that there are gaps. And that will slow you down."

As a private company with a board of directors, Seigle's is in the minority, experts say. And the practice of having an independent, outside board is even less common among family firms--despite the fact they may need it more than most firms to help mediate family squabbles. In fact, only about 15 percent of all family firms have three or more independent directors, Mendoza says. But the idea is gaining ground, he notes.

Clearly, not every tiny start-up needs a full-flown board of directors right off the bat. Establishing a board often is a multistep process for young companies, says Mark Lange, executive director of the Cassopolis, Mich.-based Edward Lowe Foundation, which focuses on second-stage companies. "We try to get companies to think about getting to the next level," he says. One way to do that is to learn from your peers, particularly those in businesses a couple stages beyond yours.